Additional profit tax for electricity companies and companies in the fossil fuel sector has been approved by the Finnish Parliament
The Finnish Parliament has approved, subject to certain modifications, the Government Bill to impose an additional 30 % profit tax on electricity companies and an additional 33 % profit tax on companies in the fossil fuel sector on top of the standard 20% corporate tax rate. The Act came into force on 24 March 2023.
You can find our previous article on the Government Bill here. The Parliament made the following amendments:
- The threshold for minor electricity business that is outside the scope of the additional profit tax is only defined based on the electricity business’ turnover (EUR 500,000).
- The acquisition cost of Mankala-shares may be included in the equity of the electricity business, as described in more detail below.
- The definition of internal domestic electricity business (which is outside the scope of the additional profit tax) is in line with the scope of the transfer pricing adjustment provision and the definition of intra-group transactions included in it.
The additional profit tax is based on the Regulation of the European Council on emergency intervention to address high energy prices (EU 2022/1854) and the Finnish Government’s budget negotiations in fall 2022. It is intended to be non-current, i.e., it will only relate to profits generated during the 2023 tax year.
Electricity businesses subject to tax
The additional profit tax is applicable to enterprises producing and/or selling electricity. In addition to Finnish companies, the tax applies to Finnish permanent establishments of foreign companies. However, the tax does not apply to the foreign permanent establishment of a Finnish company.
The so-called Mankala-companies that sell electricity to their shareholders at cost are within the scope of the additional profit tax. However, since these companies do not make a profit but show a zero result, the tax is not, in practice, levied. Specific rules apply to the shareholders of Mankala-companies (please see in more detail below).
Partnerships producing and/or selling electricity are also subject to the additional profit tax. Even though partnerships are not separate taxpayers for corporate tax purposes but the tax is assessed at the level of the partners, the additional profit tax is levied on the partnership.
Companies that are engaged in minor electricity business are outside the scope of the new tax. A company is engaged in minor electricity business if the turnover from its electricity business is less than EUR 500,000 per year. The additional requirement that the turnover of the electricity business stayed below 10 % of the total turnover was removed during the proceedings in the Parliament.
The additional profit tax does not apply to transmission system operators, or to the production or sale of thermal energy in the co-production of electricity and heat. In addition, electricity used within an entity’s group is not subject to the additional profit tax. The additional profit tax does not apply to companies engaged solely in the electricity retail business. However, electricity retail companies that have their own electricity production or own shares in Mankala-companies or belong to groups that have their own electricity production or own shares in Mankala-companies are subject to the additional profit tax.
Calculation of the taxable electricity business profit
The additional profit tax rate is 30 % and the tax is paid in addition to the standard corporate income tax at the rate of 20 %. The additional profit tax is not deductible for income tax purposes.
The taxable base is the electricity business’ net profit, which exceeds a ten % annual return on the amount of shareholder’s equity recorded in the electricity business’ pro forma balance sheet relating to the previous year.
Companies are obliged to unbundle their electricity business from their other business and transmission business in accordance with the Electricity Markets Act, and to prepare and publish a separate balance sheet and income statement for the electricity business. The principles applicable to the unbundling are defined in the Electricity Markets Act and the relevant decree of the Ministry of Economic Affairs and Employment. These unbundled accounts are used as a basis for the allocation of income and expenses to the electricity business and the shareholder’s equity of the electricity business.
The electricity business’ taxable profit is calculated in accordance with the provisions of the Finnish Business Income Tax Act. This means that the yearly depreciations and other accrual rules concerning electricity business follow the rules applicable to corporate income taxation. In addition, the amounts of depreciations (as well as other voluntary deductions) follow the amounts that the company has deducted for corporate tax purposes.
As machinery and equipment are depreciated for tax purposes as one item, special rules apply to the allocation of the tax depreciations of machinery and equipment to the electricity business. The additional depreciations available for investments in new machinery and equipment in 2020-2025 are also taken into account.
The interest barrier rules contained in the Business Income Tax Act do not apply. Consequently, interest expenses are fully deductible.
When calculating the electricity business’ taxable profit for 2023, tax losses from previous tax years are not considered. However, group companies are allowed to spread taxable profits and losses from the electricity business within the group, even though the use of direct group contributions is not permitted. The 2023 taxable profit from electricity business is compared to the shareholders’ equity on the FY 2022 pro forma balance sheet relating to electricity business. However, some amendments are made due to, for example, the fact that electricity used within the group is not subject to the additional profit tax.
Even though Mankala-companies are subject to the additional profit tax, they do not in practice pay the tax, since they sell the electricity to the shareholders at cost. If a shareholder sells its share of the Mankala-company’s electricity, the shareholder is subject to the tax. The Parliament added provisions to the effect that shareholdings in the Mankala-company’s equity may be taken into account in the taxation of its shareholders. This is done by replacing the pro rata share of the equity with the acquisition cost of the Mankala-shares. In this case, the pro rata share of the interest expenses is also not deductible.
The taxpayer submits a separate tax return for the assessment of the additional profit tax during spring 2024, and the Tax Administration imposes the taxes to be paid by the taxpayer during 2024. The exact filing and assessment times are determined later by the Tax Administration.
FY 2022 electricity business accounts are important
The 10 % threshold is calculated based on the shareholder’s equity in the FY 2022 pro forma balance sheet relating to the electricity business. Consequently, the decisions and selections made when preparing the FY 2022 annual accounts have an effect on the additional profit tax liability.
A pro forma P&L and balance sheet of the electricity business are included in and published with the annual accounts. As limited liability companies are required to prepare their annual accounts within four months from the end of the accounting period, companies do not have much time left to consider their options.
Additional profit tax in the fossil fuel sector
Companies in the fossil fuel sector are subject to the additional profit tax if more than 75 % of their turnover is generated from the production of crude petroleum or natural gas, the production of refined products from crude petroleum, or the production of coal products. The production of bio fuels would not be subject to the additional profit tax.
The additional profit tax in the fossil fuel sector amounts to 33 % of the profit which exceeds 120 % of the average annual taxable business income deriving from the 2018-2021 tax years.
The Parliament has not identified any Finnish taxpayers that would be subject to the additional profit tax in the fossil fuel sector.